Strategic Management of LOreal - Research Paper Example

Strategic management: L’Oreal Executive summary This report examines the strategic management perspectives concerning L’Oreal’s current SWOT environment and its product placement strategy based on Ansoff’s Product-Market Growth Matrix. This analysis is based on information provided by L’Oreal’s website and a number of journal articles in addition to some books. Some useful websites on company data also have been of great help in this respect. Its SWOT environment is determined by a higher level of strategic competition while Ansoff’s Product-Market Growth Matrix necessarily captures L’Oreal’s current market penetration and product diversification strategies in full swing. In fact its global operations in 130 countries have given it a strategic edge against its rivals in markets and put it ahead of many of them in every aspect of a priori orientation. Organizational culture, leadership and structure also have played a deterministic role in the process and their impact on organizational and strategic marketing outcomes assumes a dimensional shift away from the conventional approaches that have hitherto characterized many strategic marketing plans of global leaders. The outcomes of this report have basically been focused on the vision and mission of L’Oreal’s strategic dynamism and also minor faults. In short L’Oreal has not been a stupendous success story either. Introduction Founded in 1909 by a chemist, Eugene Schueller in the French city of Clichy, L’Oreal today is a public company with 23 global brands being sold in almost 130 countries, with approximately 67,662 employees and annual sales worth € 17.5 billion in 2008. Its five ranges of brands include those consumer products, professional products, luxury products, Active Cosmetics and Body Shop products Being the biggest seller of beauty care and hair care products in the global markets, L’Oreal is not only the market leader but has substantial amount of super brands or core brands. Its product diversification strategy includes not only cultural elements but also price tags. Above all its net profit margins have been doubling every five years during the last decade. Its research strength on new production processes and techniques has no parallel in the industry. Above all its relatively frequent introduction of new products enables it to outdo rivals well (Rainey, 2005). 2. Analysis 2.1. Internal analysis 2.1.1. Strengths 2.1.1. a. Strong portfolio of brands Its current strengths are based on aspects related to a very strong portfolio of well known brands like Body Shop, Garnier, Karatase, Redken, and Maybelline. LOreal has a strong and ideal portfolio of brands to penetrate and occupy new markets all over the world. For the attraction and retention of loyal costomers, strong brand equity and product portfolio can be capitalized. Meanwhile strong brand carries out product development as well as new business opportunities (Cateora and Graham, 2008). 2.1.1. b. Diversified geographic presence LOreal’s geographically diversified presence in different regions in the world including those of the emergent markets like India has enabled it to achieve growth across a broader spectrum of market segments for a variety of brands. By means of its geographic diversification, the company is able to withstand a setback in any region where it succeeds. Besides this strength L’Oreal has also been strategically positioned in the international markets throughout the world. Its current strategic operational strength lies in this latter capability built through sustained efforts over the years. In the global beauty care industry advertising is an integral part of competition strategy and therefore there is no gainsaying the fact that L’Oreal has been able to use it to achieve marketing synergies – sales volumes, brand dependency and upward benchmarking (Doole and Lowe, 2004). Advertising has been a very strong marketing proposition used by L’Oreal in the face of sustained articulate competition. It spends almost $1.5 billion annually on advertising that alone is enough to drive its competitors into frenzy on their own. 2.1.1. c. Strong R&D Next it has a very strong tradition of R&D which has been considered to be on par with any bigger personal care product research labs in the world. Even though these positive synergies have been achieved at a fairly rising cost they have been the revenue drivers of the company so that rivals have been forced into countervailing advertising efforts. Such advertising costs incurred by competitors involve regular expenditures that would act as an inhibitor on cash flows. L’Oreal’s own strategy of wrong-footing rivals has been very successful because the latter would not know when and where new products would be launched by L’Oreal. Above all its well calculated moves in Mergers & Acquisitions (M&A) in the recent past have outdone the rivals. In fact a series of positive synergies achieved through these acquisitions have had a desirable impact on its global strategic operations ranging from North America to Europe. In fact it makes 80% of its total sales outside France (Gregory and Weichmann, 2001). Along with the expanding global demand for beauty care products, competition has also been growing. Thus exponential growth figures in demand have not exclusively favored L’Oreal only. They have equally well favored its rivals as well. Such outcomes produce a complex SWOT environment that in turn is underlined by organizational leadership, culture and structure (Dobson, Starkey and Richards, 2004) 2.1.2. Weaknesses 2.1.2. a. Decentralized organizational structure The most glaring weakness of L’Oreal is the decentralized organizational structure which entails more costs through its mammoth network of stores. When number of subdivisions increases with many director level positions the decision making process would be delayed. This is already apparent in its unwieldy network of stores that operate with a degree of independence though. The organizational structure needs to be a strength by way of its formation to enable staff to interact effectively so that organizational goals would be achieved (Aaker, 2007). Thus there is a difficulty in identifying which cost center is more ineffective as against which cost center is effective etc. The same decentralized management structure is responsible for the failure of communication within the organization. In vertically organized top-to-bottom structures there is a kind of uniformity in communication but in a huge decentralized structure like that of L’Oreal’s such communication can be affected. 2.1.2. b. Slow revenue growth Next weakness is the almost static revenue growth. During the last few years its net revenue growth has been affected by a number of factors including the current global recession and a falling demand. Its other weaknesses include a near total dependency on advertising to generate sales which is increasingly becoming an expensive exercise and seeking to penetrate captured markets at any cost. The latter perspective has been critically analyzed by market watchers who argue that L’Oreal has paid much less attention to its strategic marketing plans while in progress (Betton, 2007). When competitors come to realize the extent of per capita advertising expenditure per sale, it’s as if the code were found out. The strategically dynamic global market environment for beauty products presupposes the existence of an oligopolistic market structure that in turn assumes a set of far dynamic characteristics. Beauty products have been marketed on the assumption that the price elasticity of demand and by extension the income elasticity of demand, both, vary in keeping with niche market competition level in each. L’Oreal has been placing its products at a variety of levels in niche and mass markets thus superseding growth strategies of rivals effectively (Darmon, 2007). Despite this advantage, L’Oreal has found itself being the target of a recent campaign by animal rights groups who claim that L’Oreal’s practice of testing its products on animals violates ethics and therefore its products must be boycotted. This might have contributed to its slow revenue growth. 2.2. External analysis 2.2.1. Opportunities Opportunities that are literally available to L’Oreal in the international market place are many and varied. In the first instance many of its opportunities arise from the very nature of the competitive environment. Opportunities that L’Oreal and other beauty care producers of repute have in the world today are basically futuristic and sales volume based. According to current market data the global market is worth approximately $160 billion a year and is growing at roughly 7% annually. While this trend illustrates the extent to which the global beauty care market has grown exponentially and will grow in the future there is also a question mark hanging over the industry’s own capacity to meet it (Chernev, 2007). L’Oreal’s compound profit growth of 14% shows how better the company is geared to meet this rising demand. In India the company has been in the limelight for placing a specially designed range of products for men. The Indian market is characterized by its own peculiarities such as men in the south becoming more concerned about looks and skin colour (Morck, 2006). L’Oreal has successfully exploited these market trends. Its product innovation strategy has paid off though there is still a vacuum left by its inability to cope with rising costs. Its opportunities thus lie in product innovation and an equally well planned strategic approach to competition that is increasingly becoming intense and costly for all involved (Aaker, 2007). $160 billion is almost twice the annual Gross National Income (GNI) of the developing world and thus there is such a huge amount of profit to be made here. Its global leadership places it in good stead thus propelling it into competition with a greater degree of confidence. According to available forecasts L’Oreal would still be able to lead for another few years despite the current level of intense competition (Doole and Lowe, 2008). Those niche market operators have of course successfully chipped away at its market base though. 2.2.1. a. Acquisitions and alliances Some of its recent acquisitions and mergers have paid off with handsome returns by way of synergies. The rising prospects associated with its facial care division are many. In the first place the global market growth for facial care products is driven by two forces, viz. rising tendencies among youngsters to look attractive and the rising real income among women who are the majority in demanding these products (Lamont, 1991). The company made several acquisition of YSL Beaute, a cosmetics and fragrance division of the Gucci group in June 2008, Sanoflore, organic cosmetics brand, in seven European countries, Diesel and ‘The Body Shop’ in 2006. These acquisitions provide the opportunity to L’Oreal to capitalize on and explore the increasing demand for natural personal care products. 2.2.1. b. Men’s grooming market in India There is a significant boom in the men’s grooming product market in India. As one of the leading manufacturers of men’s beauty care products, L’Oreal has been able to grab the opportunity to exploit its market position to enter into the men’s cosmetics market in India. This breakthrough in a highly competitive market segment where a sizeable amount of competition comes from domestic manufacturers is really a marvelous feat (Ghemawat, 2007). Procter & Gamble and Unilever India Limited have been operating in India for decades. Thus the intensity of competition is so high in skin care and personal care products segments. 2.2.1. c. Raising European facial care market In 2008 alone the total revenue earned by the European facial care market was estimated at $11,300 million. This figure represented an annual compound growth rate of 4.5% for the period between 2004 and 2008. With forecasts predicting a deceleration in market performance due to the global current economic downturn still there is the possibility of the market growing at ACGR of 3.5% during the five-year period from 2008 to 2013. It’s expected that this trend would generate total value of $13,400 million by the end of 2013. LOreal already has a strong foothold in European market and hence is well positioned to benefit from the demand for facial care markets. The company generates 45.5% of its total revenue from the Western European market. 2.2.2. Threats 2.2.2.a. Growing competition One of the greatest threats is the increasing competition against L’Oreal. A number of companies involved in manufacturing cosmetic products compete with L’Oreal through door-to-door sales, through mail order or telemarketing by representatives of direct sales companies. The company should always focus on brand, quality, performance and price which have significant impact on consumers’ choices among competing products and brands. 2.2.2.b. Growing counterfeit market Yet again another equally formidable threat comes from counterfeits. The growth of the demand of counterfeit goods has been increasing day by day and is affecting not only the sales but also good will and image of the recognized brands. Moreover it is reported that the sales of these counterfeit goods are expected to cross $2 trillion by 2026. Counterfeit products enter into the market through low price offerings with the appearance of the brand labels. However underperformance of the counterfeit products may spoil the brand image of the established brands like that of L’Oreal. Counterfeits are not priced lower but also come in greater weights. Gullible consumers tend to buy such products with the hope of multiplying long term gains and savings. 2.2.2.c. Global economic downturn Next threat comes from the current global economic downturn. The current demand levels for beauty care products have been falling for a number of years with no end. According to current forecasts this could go on for a few more months if not years (Margaret and Lynch, 2008). For instance it has been said by market analysts that cheap counterfeits are popular because the originals are more expensive. The global economic crisis has adversely affected the company’s business, especially in North America.. The income elasticity of cosmetic goods has positive impact. As a result, the purchases of cosmetic products tend to decline during the period of recession, when disposable income is lower and it may lead to the decrement of sales of its product. If this continuously happens, the company may have to face the declines of its revenues, profitability and cash flow due to the lack of demand. 2.3. Ansoff’s Growth Matrix 2.3.a. Market penetration and selling existing products in existing markets Under this concept L’Oreal markets its existing products to its existing customers. The company must consider the following for market penetration. In order to achieve a major market share by competitive pricing strategies, advertising, sales promotion, and personal selling, the company must adopt a market-oriented strategy. When it follows this kind of strategy the company should consider the cost and L’Oreal has been doing this. (Solomon, Bamossy, Askegaard and Hogg, 2007). Yet, what’s retained should not involve greater cost (Harris and McDonald, 1994). Though as mentioned above product or brand dependency might not be possible due to homogeneity, market penetration need not depend on brand loyalty. Product diversification is an essential element of the program. “The key to successful growth and development of small firms lies in their flexibility and ability to respond rapidly to market change and customer needs” (Butler, 2001, p.46). Another objective of market penetration is maximizing the sales to existing customers. This strategy can be achieved by introducing new loyalty schemes, membership or priviliged cards for loyal customers (Kapfere, 2004). L’Oreal can also use the strategy of restructuring the current market strengths by driving out the competitors. 2.3.b. Market development and selling existing products in new markets Under this concept, L’Oreal markets existing product lines in new markets. The company should approach this kind of strategy by means of entering into new markets: exporting the existing product to new countries, new product packaging, new distribution channels, different pricing policies for different customers or creating new market segments (Egan, 1998). 2.3.c. Product development and selling new products in existing markets Under product development strategy, L’Oreal has been launching new products every now and then in its existing markets thus rendering rivals’ products obsolete. (Kerin, Hartley and Rudelius, 2003). This strategy requires new competencies and the development of new products that can appeal to the existing markets and customers and compete against competitors’ products. For instance the recent strategic shifts in its product development to constantly renew existing product lines in existing markets have paid off well by way of revenues(Davis, 2007). 2.3.d. Diversification This strategy involves selling new products in new markets. L’Oreal has been constantly pushing new products into new market segments such as those in Asia and the Middle East. The recent foray into the Indian market shows how L’Oreal has targeted new markets with innovative strategies. Though the company has been wary of the risk factors in a relatively domestic firm dominated market, its strategy has paid off so far. 2.4. Innovation Market segmentation on the basis of customer preferences is possible in the global beauty care industry. It’s imperative for the average firm to define and identify customer requirements, followed by targeting a segment with an appropriate marketing strategy (McDonald and Dunbar, 2004). L’Oreal has a broader range of distinct market segments on the basis of customer preferences. Firstly there is the commonly known consumer products segment where the customer prefers to keep his expenditure under a known minimum (Haig, 2006). Next there is the range of professional products followed by luxury products, Active Cosmetics and Body Shop products. The appropriateness of the strategic competitive approach depends on the firm’s own capacity for the functional integration of all its strategically important functions from marketing to delivery so that competitive advantage will be achieved (Porter, 1998). Lateral integration of functions across an organization to achieve competitive advantage against other similar beauty care organizations in the industry is a well known business tactic. Tactical strategies adopted by organizations to avoid risk are common in every industry. Such strategies have been criticized by many writers due to their escapist element (Simonson and Schmitt, 1997). 2.5. Organizational leadership Organizational leadership, structure and culture have a very strong impact on the corporate governance principles including corporate social responsibility (CSR). The global beauty care industry has been subject to intense pressure by social groups that often question the credibility of carrying out tests in labs by using animals in the first instance. However CSR goes beyond this primary concern (Crane, McWilliams, Matten, Moon and Siegel, Eds, 2008). In fact it encompasses a whole range of ethical standards that include a self-imposed regulatory regime by the management of the company to comply with its own mission and vision. In other words CSR requires the organization to be accountable to the all stakeholders – shareholders, directors, managers, employees, suppliers, creditors, debtors, consumers, governments, local authorities and so on. Thus CSR is basically about sustainability of the environment in which the organization functions. 2.6. Organizational structure L’Oreal is well known for its highly diversified organizational structure which at times has been described by critics as unwieldy. With a number of production facilities spread across the world the company has grown into mammoth entity and thus its organizational structure requires to be democratic. Though it’s democratic and departmental heads are noted for delegating powers and functions to subordinates in a more convivial manner, there is still a lack of communication feedback from the bottom layers of the organization to the top management. 2.7. Technology Technological developments at L’Oreal have been one of the baric strengths during the last few years. However this doesn’t mean that initially there was no technological improvement to its production process. Its current technology leadership dimension is said to be due to a consistent policy of developing technical capabilities beyond the current requirements. In fact its operations at the factory level have all been computerized and robotized. 2.8. Organizational culture L’Oreal’s organizational culture is basically the very nature or the character of the organization. In other words organizational culture refers to a system of values, beliefs, assumptions, norms and even the way in which the organization’s members conduct. Irrespective of its size every organization seeks to achieve some goals. It’s these goals that define the very culture of the organization. Though organizational goals are nearly identical or homogeneous there can be some very pronounced differences between the ways of two organizations seeking to achieve the same goals. In fact the company has received the “Diversity Best Practices’ Global Award” recently for its efforts to create an environment of inclusion and diversity for the employees of the company (Thomas, 2006). Conclusion L’Oreal has been a success story in the global cosmetics industry with the leadership position intact for a number of years. However all this success has not been without efforts at every level of the organization. In the first instance its strengths range from its very strong tradition of research to the current global presence in 130 countries with 5 brand identities. Under each brand identity class there is a range of brand names that create superior images in the mind of the customer (Milady, 2002). Similarly it has some weaknesses related primarily to the structure of the organization. The mammoth network of divisions and stores spanning the globe has not helped it much. In fact costs keep on rising with such unbridled expansion, along with rising advertising costs. The very management or leadership style too has been questioned for its inability to keep track of what happens in a decentralized structure of this size. Opportunities of L’Oreal include those related to its very size. This is a paradox though. Its global presence allows it to initiate diversity and CSR related programs. Finally its threats come from not only rivals but also animal rights groups and counterfeits that are easily marketed by using modern technology. REFERENCES 1. Aaker, D. A. 2007 , Strategic Market Management, 8th edn, , Wiley & Sons inc. , New York . 2. Aaker, D. A. , & Joachimsthaler, E. 2000, Brand Leadership: The Next Level of the Brand Revolution , Free Press, New York 3. Betton, C. I. 2007 , Global Regulatory Issues for the Cosmetics Industry , William Andrew Publishing , New York. 4. Butler, D 2001 , Business Development : A Guide to Small Business Strategy , Butterworth-Heinemann , Oxford . 5. 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